As Income Mobility Falls, American Dream Fades

Last Updated Sep 2, 2009 4:31 PM EDT

In America today, how likely is it that a son will eventually attain higher earnings than his father? If dad's wages rank in the top 20 percent, pretty good -- the boy has a roughly 57 percent chance of surpassing his father, according to the Economic Policy Institute. But if dad is among the bottom 20 percent, his son only has a 4.5 percent chance of one day having higher earnings. Statistically, in other words, he's probably doomed.

The idea that people have an equal opportunity to climb the economic ladder remains central to this country. It doesn't matter where you start, according to this doctrine, because what matters is where you're going.

But a new study out of the Federal Reserve Bank of Boston suggests the American Dream may require revision. It shows that income mobility for U.S. families has been falling for nearly 40 years. Income inequality accelerated in the 1990s, compared with the '70s. Notably, the poorest families fare the worst in improving their economic circumstances.

Put another way, these findings suggest that where people start on the economic ladder more or less determines how high they climb, and by and large that's not very high. In an era of rising unemployment, rampant home foreclosures and uncertain health reform, that has grave implications for any discussion of public policy and, more broadly, for social welfare.

It's also -- and I don't use this term lightly -- un-American. One of our most cherished cultural ideals is that economic opportunity nullifies inequality, whether stemming from class, race or other factors that historically have impeded progress. If lower-income people are, in effect, economically immobilized, then it's time to re-think that particular nostrum (click on chart to expand).

Assessing income mobility is difficult. Results can differ significantly depending on whether you look at, say, pre- versus post-tax income, what period of time is being measured and myriad other factors. Social scientists even disagree on what "mobility" really means.

For their study, economists Katharine Bradbury and Jane Katz define it as the "pace and degree to which individuals' or families' incomes (or other measures of well-being) change over time." Drawing on an ongoing U. of Michigan study launched in 1968, the researchers examined income patterns through 2004 for 3,000 to 4,000 families to see how they fared over four-, 10- and 16-year periods (data from more recent years were less rich, which made it hard to draw conclusions). "Income" here consists of wages, salaries, rent, interest, pensions, welfare and other standard sources of funds. The research also considers how black families' income has moved relative to white families.

By one key measure of mobility, the percentage of the poorest families who were able to rise to the next level of income fell from 51 percent in the period 1968-1978 to 46 percent in 1993-2003. Top income earners who fell to a lower level declined less, from 56 percent to 54 percent. From the late 1970s through the early 1990s, more families became very poor, and fewer succeeded in escaping extreme poverty.

In short, income mobility is falling faster at the bottom of the ladder than at the top. And the poorer you get, the more likely you're going to stay that way.

Other findings from the study:
  • 40 percent of families were in the same income class in 2004 as in 1994, while only 22 percent moved up or down by more than one class
  • 54 percent of families who started in the poorest income class in 1994 were still in the poorest class in 2004; only 5 percent of these families made it to the richest income class (see chart below)
  • Although families who started in the middle three income classes were more likely to move than those who began at the top or bottom, they were more likely to end in the same income class where they started
  • 53 percent of families who started in the richest income class were at the top in 2004; about 10 percent of these families fell to the poorest two classes
  • In 1994, 44.5 percent of black families were in the poorest income class, while 6 percent were in the richest class; those figures were virtually unchanged in 2004
  • Of black families who began in the poorest class, almost three"quarters were in the lowest income segment 10 years later; that compares with 44 percent of white families who stayed very poor
Just why the income ladder is getting harder to scale is complex. Some reasons are obvious, such as persisting inequality in access to education. It also probably reflects fundamental changes in our economy, including a shift from manufacturing to service-sector jobs and the premium on skills valued among so-called knowledge workers, such as technology expertise. Demographics, too, are important -- whether you're married, have kids or are disabled, among numerous other factors.

Meanwhile, the route to higher income mobility cuts across many policy domains, from taxes and financial services to education, health care and urban planning. Clearly, it's a Herculean task to reverse the trend toward this evident narrowing of opportunity, and it will take social awareness and, perhaps most of all, political will.

Some will argue that upward mobility, or its absence, is largely a function of individual talent and effort. Perhaps. But that's a discussion unto itself. What's clear is that it's no easier to lift yourself out of poverty today than it was 40 years ago. And for most of us getting ahead is harder than it used to be. Whatever progress looks like, this isn't it.

In his seminal book "The Other America," the writer and political scientist Michael Harrington highlighted the importance of something he regarded as a defining feature of American life. "If a group has internal vitality, a will -- if it has aspiration -- it may live in dilapidated housing, it may eat an inadequate diet and it may suffer poverty, but it is not impoverished."

That vitality, passed along from fathers and mothers to sons and daughters, is in increasingly short supply. By that measure, we're all getting poorer.

Graphs courtesy of Federal Reserve Bank of Boston.
  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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